US dominates Davos from afar

Several bankers have explained that they are doing useful work that serves the public. Lets put the emphasis on making sure banking and finance, in general, are allowed provide those services and made to do it fairly and honestly.

The more I read about the whole area of B&F, it seems have a lot of people ready to turn a blind eye to anything and lacking in any professional pride.

Breaking banks into smaller pieces will not necessarily make 'bad paractices' go away.

And I am not convinced that rules and reegulations will help unless the right people (poachers turned gamekeepers?) are found to police B&F.

When two tribes go to war

Threaten to publish the home addresses of the greedy bunch -- they might start to behave

Mervyn the wimp allowed himself to be prevented by Drongo from curbing the property boom

Anyone care to defend the banking system? But of course bankers can be unethical no matter the size of the bank but what has happened was bankers quit being bankers and started becoming market gamblers, with your money. They realized that in collusion they could fire up markets, make a lot of money and let it crash with relatively little harm to themselves. The great minds of banking say they were unaware of the unfunded insurance for all the bad loans they made which makes one wonder what they are doing in a field that is primarily one of risk managment. Personally. jail time and hangings would be in order, so breaking them up so that they can no longer manipulate markets seems less punishment than deserved. The more difficult action is getting this done. Any review of legislative hearings will show that the governments were informed that this was basically a house of cards in 2001 and yet the banking lobbyist were able to prevent any legislation through the efforts of their bought and paid for legislators. These are the same people who will be making these decisions so the outcome is surely not determined. The Conservatives will all cry about free enterprise and private markets and their right to gamble away the retirements of millions of citizens. When the cops are the criminals, no one is looking out for the people. Makes one reflect on what Marx had to say about the demise of the West.

I copy a post below from 'marettina' posted at the end of RP's last but one blog...probably not many have seen it....however I think it's a very ggod post worthy on this blog...

93. At 1:23pm on 27 Jan 2010, marettina wrote:

...As for the truth behind Obama’s reforms you need to look at who is holding the heavyweight economic positions and who is in Obama’s inner circle. They are none other than the ex-bankers who caused the crisis in the first place.

The very people Mr Obama employed to help him put his economic team together were from Citigroup and Goldman Sachs. Poulson, Geithner, Rubin, Froman, etc. These guys have long and incestuous careers - they all move around together and employ each other, throwing in a bit of nepotism for good measure - jumping from government to investment banks and back to suit.

It runs deep. These ex-bankers are the very people who were working behind the scenes during deregulation (Clinton administration) and then were instrumental in drawing up the bailouts and TARP (effectively to bail themselves out). And surprise surprise, they are right there now writing up the “reforms”. With carefully crafted juicy loopholes, no doubt.

And that’s how it all happened right under our noses. The political power has now firmly shifted to Wall Street and the taxpayer has effectively become the welfare provider. They’ve closed the circle and the outrageous level of greed can continue to go unchecked as before. It scares me to think what their next move will be.

I like Obama. But I’m afraid they’ve put him in the chair to keep it warm.

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Maybe Obama's not just keeping the chair warm....maybe, just maybe, he's a bit smarter than we give him credit for...he must recognise that most of the current treasury team around him were actually some of the architects of the economic mess we now find ourselves in. Hence he now seems to be taking counsel from an older hand i.e. Volcker, someone who has had the experience, as a previous chairman of the Fed...and more importantly one that didn't manage to trash the whole world's economy whilst in office.

Absolutely fair observation.

And thanks to 6. freemarketanarchy for an insightful post from marettina

This is absolutely the case, but I'm not so cynical and I believe that Obama is smart enough to listen to the right people.

I'm not in banking and did not make the connection with Citigroup as well, but there does seem to be a prima facie case for Goldman Sachs appearing to have... um.... err... how can one put it without getting banned from the blog..... excessive influence over the US financial system.

I put it slightly differently in a post on Robert's blog, but maybe you could confirm, Stephanie, whether another way to describe the talk in Davos would be....

No-one can believe it but it looks like Goldmans and Citigroup have "lost" the US Govt?

Ergo catastrophe for the banking class?

I don't get it.

So the Davos organisers didn't know that there would be a state of the union address in advance? I suppose, given the success of banking and finance recently, that that level of planning is to be expected.

freemarketanarchy

Soros is not stupid though. Soros does not like bubbles.

Stephanie

Interesting insights into the internal workings of the White House economics team. The world needs Obama, Geithner, Summers and Volker to get their ducks in a line, otherwise we will all suffer.

The US, WEF and the globe needs a coherent and dynamic economic strategy to reboot the US economy; the EU needs one too. It needs all the collective efforts of these not insubstantial advisers pulling in the same direction. President Obama has used the word "aggresively" several times recently, to my mind inappropriately on at least one occasion. If these advisers are not in line then he needs to bang heads together aggresively, as the US needs an aggressive growth strategy.

We need them all putting pressure on the banking community to start releasing the profits from last year to stimulate growth in the real economy.

#9 Oblivion wrote:

"freemarketanarchy

Soros is not stupid though. Soros does not like bubbles."

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Please don't get confused between a person's rhetoric and what they actually do day-to-day. We can only judge these people by their actions (go research 'JadedJean' in the archives for a more detailed explanation of how and why these people behave the way they do).

...so, on the contrary....Soros probably loves bubbles, especially big/long ones where he can invest his and his client's money in the safe knowledge of making a winning bet in a one horse race.

Gamblers tend to find stability just a bit too boring!

Being really brave would be to nationalise all the UK banks, hedge funds, private equity and all other financial services companies overnight.

Then we could kill off the hedge funds and private equity companies because they're no real use to anyone, take their money and put it into a state owned but not state managed venture fund and break up the banks as per Soros/Obama/King/Cable propose.

If you're gonna do something then do it properly and never ever let "them" have the time to escape or shift funds out of the country.

Have these people yet realized that the gravy train has hit the buffers? I think not.

Perhaps they could move their junket to another place next year. Going to Davos seems quite obscene in these terrible economic times. Do they have no understanding of the enormous economic and social damage that have down to the first half of this century.

The need to eat humble pie and get down on their knees in sack cloth and ashes and beg for our forgiveness!

#4. oap_john wrote: "Mervyn the wimp..."

I too find I am unable to find any scintilla of sympathy for Mervyn King or a rational explanation for his inactions. He had a job to do, he understood his job and he did not do his job with catastrophic consequences - yet he has not been sacked or had the integrity to resign! The same can be said of his boss in our permanent government The Permanent Secretary of the Treasury Nick Macpherson (and indeed his predecessor Gus O'Donnell, currently Cabinet Secretary.) - All trained economists (Harvard or Balliol) and all responsible for the regulation of the economy - and all culpable.

Maybe Obama has no intention of making the banks smaller. Maybe the intention was just to put the wind up the stock market and head off what was fast becoming another asset bubble. Given the reaction of the stock markets in the last couple of days it would appear to have worked.
Anyway making the banks smaller is not the solution. in fact making them bigger so that they are truly global and competitive is much more logical. What is needed is to break them up into big boring retail banks which are strictly regulated and completely separate whatever size fits investment banks.
Of course this means that we probably have to pay for are retail banking as it would no longer be subsidised by the profit making bits but hey, what price security?

14 Summitteer

Correct. Isolate and regulate retail banking. Let the others do what they will without our money.

Retail banks can make a profit without gambling; they can still lend our deposits out at exorbitant rates with FRB to assist. There is no reason why we should have bank charges as well.

'When America sneezes the rest of the world catches a cold'

Just reminds us where the power and influence really is still with the US, in the world economy.

President Obama knows that its a matter of rights - v - privileges and that's why the fed's constitutional attorneys are busy right now.

Gordon Brown is an irrelevence on the world stage in terms of finances, except for reassuring the ROW that the British tax payer is containing the toxic British banking system with debt and deficit going forward for a generation.

What Pres Obama does the ROW will have to follow and the US has a lever on the Chinese because they're holding too many dollars and reliant on a strong dollar.

12. At 10:29pm on 27 Jan 2010, Wee-Scamp wrote:
Being really brave would be to nationalise all the UK banks, hedge funds, private equity and all other financial services companies overnight.

Then we could kill off the hedge funds and private equity companies because they're no real use to anyone, take their money and put it into a state owned but not state managed venture fund and break up the banks as per Soros/Obama/King/Cable propose.


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What a ridiculously uninformed comment.

Do you know who the biggest investors, circa 70%, in Private equity AND hedge funds are these days? Yup, pension funds. Both defined benefit and contribution schemes.
And the reason they do it is to chase the extra returns on top of the meagre returns the markets deliver.

So yup by all means, cut them off. But get used to the idea of living on less in your retirement.

Or just do a bit of research into the nonsense you are spewing on this blog.

Assembling all the movers and shakers of finance and business up a mountain - is there something they know we dont - what will become of us? Alternatively a rich opportunity for the theorists of world domination and conspiracies.

The US "coming late" is a ploy that they tend to use more and more often. The Climate change discussions were nullified by the US arriving late, with a "break-up Kyoto restrictions" agenda and only discussing with the Chinese and one or two others.

If the US is against regulations for Banks (Summers is to be their rep) then we will see them doing the same thing. Obama might publicly say he wants Banks broken up, BUT Bernanke's re-nomination is in the balance, as is the exposure of Goldmans influence and THEIR probable manipulations to create the neo-depression we are in. I half expect them to arrive, and sabotage any Banking reforms to protect the Fed and Goldilocks, while cutting deals with the Chinese (again)

This blog regularly includes criticism of Mervyn King. A lot of this - such as that from JohnofHendon - ignores the fact that the Bank of England was given a specific task to control consumer price inflation. There was no remit at all to control asset price inflation. This was a major error in policy, but was the fault of the man who set up the system, ie our old "friend" Gordon Brown.

As far as banking reform is concerned, I agree with contributors to this who argue for a split between "boring" banks and "investment" banks, but I do not believe that goes far enough. The real trigger of the crisis was the failure of Lehmans, which demonstrated the dangers of very high levels of debt in any large financial institution.

An integral part of the reforms must be a limit on debt (possibly 10:1 to 12:1) for all banks, retail or investment, over a certain size, along with a return to the requirements in force in the first 25 or so years of the post-war era, that banks keep at least 8% of assets in cash and another 20% in short-term and/or very liquid funds such as government debt. There were no bank failures when these requirements were in place.

The "casino" activities can be permitted, but only in specialist institutions, who cannot do business with ordinary people, and with whom the retail banks can't do business. The other requirements here, which would moderate behaviour, are that these institutions cannot be above a certain size in terms of assets owned ($1 billion, perhaps? Too much?) and they are organized as partnerships, with unlimited liability. If their bets go wrong, the partners get cleaned out.

#17 Vinchainsaw

Uninformed nonsense is it?

Hedge funds and PE companies do not in the main help create new companies. In fact in many cases (inc the Cadbury/Kraft deal) hedge funds are actively involved in selling companies off mainly to overseas buyers. That's not strategically the brightest of actions.

As to this tosh about pension funds well then you may be right but if you are then I would say that a) supporting hedge funds and PE is not what I'd like to see my money used for and b) if they are then it's made damn all difference to the value of my personal pension funds.

Re 13 John_from_Hendon

Mervyn is obviously under Drongo's thumb -- so much for BofE independence
If he (Mervyn) had any guts, he should have resigned

freemarketanarchy

I think Soros exploits the holes in capitalism in order to patch them.

21. At 11:06am on 28 Jan 2010, Wee-Scamp wrote:

#17 Vinchainsaw

Uninformed nonsense is it?

Hedge funds and PE companies do not in the main help create new companies. In fact in many cases (inc the Cadbury/Kraft deal) hedge funds are actively involved in selling companies off mainly to overseas buyers. That's not strategically the brightest of actions.

As to this tosh about pension funds well then you may be right but if you are then I would say that a) supporting hedge funds and PE is not what I'd like to see my money used for and b) if they are then it's made damn all difference to the value of my personal pension funds.


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Well yes, it actually is uninformed nonsense. And I'll tell you why.

As I mentioned above pension funds are the biggest players in the HF and PE world.
Even despite the credit crisis both PE and HF have, to varying degrees depending on the strategy employed, enjoyed surplus returns, at lower risk, to a traditional pension portfolio which you seem to be advocating above.

Over a period of say 20 years, by not including HF and PE in your pension portfolio, you'd probably halve your pension pot thanks to the wonders of compounding interest.

So yup, uninformed nonsense, unless you intend living on less than you would simply to stand by your opinion that Hedgies and PE people are the devil, as espoused by Mr. Peston.
Think for yourself.

As for your assertion that PE and HF dont do anything I beg to differ. Hedge funds add market liquidity which is vital to an efficiently priced market. They also provide massive debt funding for all level of company, mostly playing in below-investment grade debt that nobody else will touch, especially not now.

Venture capital, which is in the PE space, targets comapnies that are not even profitable yet and pumps money into such companies while they are devleoping.
Do you know of a bank that will lend to companies without an established track record and one that is unprofitable?

Where you pulled Cadburys/Kraft from and linked that to HFs and PE only you will know. Let me guess- its bad so somebody must be blamed and Hedge Funds and Private Equity were the only names that came to mind?

Oh, and just for the record, can you imagine how badly your pension fund would be doing without the above-average returns delivered by HF and PE?

Re 22
How inconvenient it would have been for Drongo, if Mervyn had had any guts?

To Vin at 17:

Do the pension trustee's really follow such a speculative investment approach?

And to be honest, as we've been reminded over the past couple of years, shouldn't we realise that the only way to accrue money is to work for it, instead of relying on some FSA authorised scam encouraging us to gamble for it!

26. At 12:26pm on 28 Jan 2010, Clinterous wrote:

Actually pension funds do follow this approach as both HFs and PE arent very correlated to traditional assets like stocks and bonds.
By including hedge funds, pension funds are actually decreasing the risk of their portfolio because when stocks and bonds take a hammering HFs and PE arent normally as affected. Old tales about eggs and baskets could be repeated her. Obviously when we go into market meltdown everyone suffers but, if truth be told, these two investment approaches arent actually too risky at all.

Granted there are a few cowboys out there but there are also cowboys in every trade in the world. From builders to plumbers to used car salesman.
The vast majority of hedge funds employ relatively low risk strategies and have lower risk ratings than the stock market where the rest of your pension is invested.
They do this principally through the employment of insuracne against their positions using credit derivatives etc.

So yes, no pension fund is able to survive without the extra returns HF/PE bring and the risks they hedge away as they are largely uncorrelated to the rest of the market.

If the investment strategies like PE/HF add an extra 2 or 3 percent to the yearly returns they'll double your pension within 20 years. It simply isnt possible to fund the expected pensions without using these products.

Unfortunately hedge funds in particular have become a lightining rod for politicians who've been wanting to have a go at them for ages and now, despite the fact that they had very, very little to do with the crash politicians are taking this opportunity.

Just for clarity, neither hedge funds nor private equity have ever been involved in CDOs. CDOs were created by banks looking to off-load badly-performing loans from their balance sheet (and still make a little bit of money by offering this product).